7th Pay Commission – Big disappointment on many counts – NK Singh

7th Pay Commission – Falls Short on Several Counts – The pay is likely to increase 16%, allowances 63% and pensions about 24%. This is less than the overall hike of the Sixth Central Pay Commission.

The Seventh Pay Commission has recommended a 23.55% hike in the pay and allowances of government employees. The pay is likely to increase 16%, allowances 63% and pensions about 24%. This is less than the overall hike of the Sixth Central Pay Commission. From January 1, these will benefit 4.8 million central government employees and 5.5 million pensioners. The minimum basic pay of central government employees is Rs 18,000 per month while the maximum is Rs 2.25 lakh per month. Its immediate monetary impact is Rs 1.02 lakh crore. This does not include the impact on the finances of the state governments.

There are, however, significant policy issues that remain under-addressed. One of the terms of reference of the commission was to “make recommendations on best global practices and its adaptability and relevance to Indian conditions”. This raises several issues concerning meritocracy, attracting and conserving domain knowledge, rationalising the size of the government, and productivity-linked wages.

On meritocracy, the key policy issue relates to compensation for the talented in the private sector. The commission had initiated a survey by IIM Ahmedabad to understand the compensation structure in the government sector relative to the private sector. The results indicated that while at the entry and middle levels the government pays better than the private sector, it falls way behind the latter in compensating the highest echelons. It is argued that government employees enjoy several non-tangible benefits such as job security, inflation-indexed salary and assured prospects of financial progression. It appears that the cost to government (CTG) or total outflow per civilian employee works out to more than three times the received salary. It is higher (3.75 times the salary) in the railways and even more so in the armed forces (four times). Hence, salary hikes are perhaps an extravagant expenditure for a developing country like India. But, this argument ignores the fact that at the top level the government competes for the same talent pool as the private sector. It is impossible for the government to match the pay hikes in the private sector at that level. This makes it mandatory for the government to have a pay commission every 10 years.

On the issue of lateral entry, the commission has, regrettably, dealt with only the lateral entry or re-settlement of the defence forces personnel in the Central Armed Police Forces (CAPFs) and civil defence organisations. The wider issue of attracting talent at middle levels within the government needs consideration. Our practice and emoluments structure inhibits domain experts from joining the government. This emanates as much from the compensation package as a mindset change. Part of the problem is a “socialist mindset”, in which we seek proportionality between the highest and the lowest without recognising that the principle of equity inhibits a compensation structure for domain skills in relation to market-based conditions.

Administrative reforms would by themselves be insufficient, given the proliferation of regulatory institutions in electricity, telecom, roads and highways, the financial sector, to mention a few. Reinvigorating the bureaucracy by inducing the best market talent needs a mix of both administrative and emoluments changes. It is important to attract experts in many spheres.

The Sixth Pay Commission had made far-reaching recommendations to downsize the government. The outcome was quite nominal. The debate has moved to ‘right sizing’ rather than downsizing. According to estimates, the central government workforce (excluding the defence forces) is likely to expand from 3.31 million in 2013 to 3.55 million by 2016. The police alone would account for an increase of 120,000 people (50%). However, this expansion is necessary for India’s internal security. Therefore, what is needed is to downsize the workforce from less efficient job areas (perhaps where technology can lead to higher productivity gains) while expanding it in critical domains to improve efficiency in service delivery.

Part of the problem is the pace of reforming important PSUs. The pursuit of the disinvestment programme has not resulted in a significant restructuring of the workforce. Privatisation, in general, is not in favour. Reforming and restructuring the PSUs is the preferred path. But this exercise must look at all aspects of efficiency.

The commission has recommended introducing a performance-related pay (productivity-linked wages) mechanism for all categories of central government employees. The last three commissions had stressed the performance-related pay (PRP) concept as a far better system than the periodic increase in salaries. The commission has also suggested linking bonus payments to productivity (individual, group or organisation). However, unlike the private sector, which is guided by profit motives, the government is guided by social considerations. This makes the measurement of productivity problematic. The commission has recommended phasing out non-performers after 20 years of service.

International experience suggests that countries such as South Korea, Chile, Malaysia and the Philippines have improved government performance and accountability by implementing PRP in their civil services. This has lessons for addressing the low public sector efficiency issue by incentivising productivity improvements.

Mechanically setting up a pay commission every 10 years is a habit we can ill-afford. Hopefully, this will be the last such commission. It is believed that the major issue of seeking dynamic parity between the private and public emolument structures has been addressed over time. The subsisting concerns are attracting domain knowledge, facilitating lateral entry, restructuring the personnel pattern of the government and linking productivity outcomes with the emolument structure. A mechanism needs to be constituted for these more important non-financial issues. Administrative reforms and pay reforms are two sides of the same coin. An integrated view is necessary.